In the corporate landscape, a subsidiary refers to an entity that is owned and controlled by the parent company. Usually, such companies do not have control over half of their stock because the parent company holds it. Technically, where a subsidiary is 100 per cent owned by another company, such entity is known as a wholly-owned subsidiary. In the status quo, subsidiary companies do not have the leverage to hold any percentage of shares in their parent organization. This write-up aims to analyze the scope of shareholding rights of a subsidiary in its Parent Company
Provision for Subsidiary company’s shareholding Rights in its Parent Company
Companies Act, 2013 prohibits subsidiary companies from holding any shares in their holding company, either themselves or by its nominees. Likewise, in Light of the said Act, the parent or holding company is prohibited from making any share allotment to its subsidiary companies.
However, this limitation is not applicable to the following conditions:
- The Subsidiary company holds shares of a deceased member of the parent company as a legal representative
- Where the Subsidiary entity holds shares as a trustee
- Where the Subsidiary entity acting as a shareholder even before it doesn’t have the status of Subsidiary company
- The parent entity only in respect of the shares possessed by it as a trustee or as a legal representative, as mentioned in clause (a) or clause (b) of the said proviso
- In a nutshell, it can be presumed that under the influence of the said Act the Shareholding Right of the subsidiary company would cease to exist.
Possible Impact of shareholding limitations on the Subsidiary company
In light of the above, Subsidiary company do not have the leverage to;
- Inspect the parent company’s financial affairs.
- Vote on corporate subject matters, such as approval for potential mergers or appointing directors for the company. The right to cast an opinion or vote for a Subsidiary company is limited and thus subject to the parent company’s discretion.
- Receive dividends from the parent company.
- Attend annual meetings, either in person or through other means.
- Vote on the vital subject matter by proxy via online voting platforms or mail-in ballots.
- Claim a proportionate allocation in case of asset liquidation of the parent company.
What if the Act preserves the Shareholding Rights of the Subsidiary company?
- Overlapping of members’ interests may occur
- Control of the parent company over its subsidiary will be compromised.
- The purpose of resolving critical issues and risk diversification would cease to exist for the parent company.
- Dividend distribution may turn out a matter of conflict between the two companies.
- Tax benefits would no longer be available for the parent company.
Some Key Facts Regarding Subsidiary company
- A parent or holding company sets up a subsidiary to render the parent with specific benefits, such as increased tax relaxations, risk diversification, asset diversification in the form of revenue, equipment, or property. Still, subsidiaries hold an independent legal identity from their holding companies, which indicates in their
- A parent company buys or establishes a subsidiary to provide the parent with specific synergies, such as increased tax benefits, independence of their taxation, liabilities, and governance.
- If a parent company has a subsidiary unit abroad, the subsidiary is obligated to abide by the nation’s law where it operates. But, given their controlling interest, these entities often have significant influence with their subsidiaries. They- in association with other subsidiary shareholders, if available- cast a vote to appoint a Subsidiary’s BODs. This may lead to the overlapping of board members of a subsidiary and its parent company.
- The paradigm of purchasing an interest in a Subsidiary company differs from a merger. The purchase does not cost a fortune to the parent company, and shareholding approval is not needed to convert an entity into a subsidiary, as it would be in the case of a merger. Nor the vote is required to sell out the subsidiary.
- To be a designated subsidiary, another company must control at least 50 per cent of the entity’s equity. If the stake falls from the said figure, the entity is considered an affiliate or associate company. Keep in mind that an associate company gets different treatment than a subsidiary when it comes to financial reporting.
- A subsidiary radically prepares autonomous financial statements. Generally, these are shared with the parent company. In response, the parent will aggregate these statements to prepare the consolidated financial statements as it does financials from all its undertakings.
- On the contrary, associate companies do not comply with such requirements. Instead, the parent company registers the valuation of its stake in the associate, treating it as an asset on its balance sheet.
- Since subsidiaries must stay autonomous to some extent, transactions with the parent company should be in the with Arm’s length concept. This may prevent the parent company from getting expected control over the subsidiary. Yet the parent company may also be accountable for criminal actions pursued by the subsidiary.
Conclusion
The concept of shareholding and share allotment is a complex subject matter in the corporate landscape. This concept gets even more complicated when it comes to subsidiary companies. These companies do not have the leverage to acquire a share in their parent companies. Plus, there are various legal conditions that apply to these entities that deal with the same context.
Not having shareholding rights undermine various leverages available to the Subsidiary company. This includes the Attenuation of rights to make any critical decision in the parent company’s meeting or casting vote for any potential mergers. The scope of their shareholding rights in this context is minimal. Though the Companies Act, 2013[1] attenuates the shareholding right of subsidiary companies in its parent company, these companies are free to acquire other companies’ shares.
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